(Current Affairs) Economy & Energy | August: 2014


Balancing act of RBI

  • The Reserve Bank of India’s credit policy review, will be the first after the new government has taken charge. It is also the second bi-monthly policy for the current year (2014-15). The RBI has switched to the system of reviewing credit policy once in two months from the earlier once in 45 days or so following the recommendation recommendation of the Urjit Patel committee.

  • Fortunately, very few expect the government to interfere, certainly not so soon after taking office. Moreover, there has been a positive message from the meeting RBI Governor Raghuram Rajan had with new Finance Minister Arun Jaitley on May26. In this very first meeting with a senior government official, Mr. Jaitley has listed out his priorities — price stability, stimulate growth and fiscal consolidation — and said he is keenly aware of the need to do a tough balancing act in reconciling the several policy oblectives.

  • India’s inflation problems are structural in nature. The RBI cannot influence supply-side factors, which are responsible for food inflation. Supply side pressures on prices will be felt when investment picks up consequent on the new government’s initiatives.

  • Balance sheet problems of public sector banks are another reason standing in the way of lower interest rates. The combination of bad and restructured loans means little room for banks to lower interest rates.

  • The policy document will stress the obvious point that inflation is a problem for the government and the RBI.

Restrictions on foreign exchange proprietary trades

  • A stronger rupee has paved the way for high-street banks to have a greater play in the currency market, with last year’s unnerving choppiness suddenly looking like a thing of the past.
  • The Reserve Bank of India (RBI) recently told several large lenders that they are free to carry out foreign exchange proprietary trades in which bank treasuries bet on the dollar-rupee movement.
  • The move will deepen the currency market and offer finer foreign exchange rates to customers, particularly large corporates with regular exports, imports and dollar borrowings.
  • The RBI allows each bank a certain net open position (NOP) limit for prop (or, proprietary) trades; the limit varies from $20 million to $100 million, depending on a bank’s size and level of treasury activity.
  • In 2013, when the rupee buckled under speculators’ attack, the limits were whittled down by banks to $5 million and even zero at the RBI’s instruction.

Key policy rates unchanged by RBI

  • Despite intense pressure and widespread anticipation, the Raghuram Rajan-led Reserve Bank of India (RBI) has decided to keep the policy rate unchanged.
  • In doing so, it has indicated that it is prepared for a wait-and-watch approach.
  • Perhaps, it has chosen to await the maiden budget of the Narendra Modi Government at the Centre so as to get a sense of direction of the new fiscal managers.
  • The Reserve Bank of India (RBI) has kept the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 8.0 per cent. It has also decided to keep the cash reserve ratio (CRR) of scheduled banks unchanged at 4.0 per cent of net demand and time liabilities (NDTL).
  • However, it has reduced the statutory liquidity ratio (SLR) of scheduled commercial banks by 50 basis points from 23.0 per cent to 22.5 per cent.
  • The apex bank has also decided to continue to provide liquidity under 7-day and 14-day term repos of up to 0.75 per cent of NDTL of the banking system.
  • Consequently, the reverse repo rate under the LAF will remain unchanged at 7.0 per cent, and the marginal standing facility (MSF) rate and the Bank Rate at 9.0 per cent.

Core sector growth at 4.2 %

  • Helped by healthy growth in electricity, fertilizers, cement and coal, the output of eight core industries increased 4.2 per cent in April, up from 2.5 per cent in the previous month.

  • The growth of the eight core sector in April, 2013, was 3.7 per cent.

  • Electricity production increased 11.2 per cent in April this year from 3.5 per cent in the same month last year.

  • Similarly, fertilizers, cement and coal registered higher growth during the month under review.

  • Fertilizers, cement and coal recorded a growth 11.1 per cent, 6.7 per cent and 3.3 per cent, respectively, in April, according to the data released by Commerce and Industry Ministry .

  • Coal, crude oil, natural gas, refinery products, fertilizers, steel, cement and electricity sectors had expanded 2.7 per cent in 2013-14. The eight industries have a combined weight of about 38 per cent in the Index of Industrial Production. Steel production increased 3.1 per cent compared with 10.1 per cent in the same month last year. Crude oil, natural gas and petroleum refinery product sectors contracted 0.1 per cent, 7.7 per cent and 2.2 per cent, respectively, in April.

FDI restrictions on online retailers to be eased

  • India could allow global online retailers such as Amazon.com to sell their own products as early as next month, removing restrictions that have held back competition in one of the world’s biggest, and most price-sensitive, retail markets.
  • The decision, which is likely to be announced in or alongside the budget, is one of the first tangible signs of economic reform by the business-friendly government of Prime Minister Narendra Modi.
  • The move could allow the government to circumvent political opposition to opening up India’s $500 billion retail sector to global retail giants such as Wal-Mart Store.

China urged to reduce finance risk

  • The World Bank and the International Monetary Fund are urging China to focus on controlling risks from rapidly rising debt due to its reliance on credit-fuelled growth.
  • The World Bank said Beijing should pay close attention to rising credit, especially in its largely unregulated informal lending market, and reduce debts owed by local governments.
  • Rising debts owed by local governments and uncertainty about informal lending have fuelled concerns China’s economic slowdown might cause a rise in defaults and hurt its financial system.
  • Chinese regulators have taken steps to cool credit growth but still are allowing a relatively fast expansion to support economic growth that slowed to 7.4 percent in the three months ending in March.
  • By the country’s broadest measure, total outstanding debt rose from the equivalent of 124 percent of gross domestic product in 2007 to more than 200 percent in 2013, according to the World Bank.
  • Corporate debt in Chinese economy , at the equivalent of 125 percent of GDP, is “among the highest in Asia.

Subsidised seeds

  • Shortage of seeds is staring in the face of the farmers ahead of kharif season in Srikakulam district, notwithstanding the tall claims by the government on making seed distribution a smooth affair.
  • It is estimated that over 1.5 lakh quintals of seeds of all varieties are needed for the farmers who cultivate 2 lakh hectares in 38 mandals. But the government is unlikely to supply the seeds in the required quantity, with the shortage of supply by the AP Seeds and other organisations.
  • The supply for the kharif season is expected to be around 49,000 quintals this time of which around 33,000 quintals have been sent to the 67 sale points set up at various places in the district.

May’s exports up by 12.4%

  • India’s trade deficit rose to a 10-month high of USD 11.23 billion in May even as exports grew by 12.4 per cent, highest rate in six months, on improvement in the global demand.

  • Trade deficit, the difference between earnings from exports and outflow on account of imports was USD 10.09 billion in the previous month. It was however, lower than USD 19.37 billion in May 2013.

  • Helped by healthy growth in key sectors such as engineering, petroleum products and garments, exports during the month increased USD 28 billion from USD 24.9 billion in May 2013. However, imports dipped by 11.4 per cent at USD 39.23 billion.

  • Gold imports in May dipped by 72 per cent to USD 2.19 billion, as against USD 7.7 billion in May 2013.

  • In the April-May period of this fiscal, exports grew by 8.87 per cent to USD 53.63 billion. Imports during the period dipped by 13.16 per cent to USD 74.95 billion, leaving a trade deficit of USD 21.3 billion.

Insider trading scheme

  • Three Indian-Americans and their associate have been charged by federal regulator in an insider trading scheme where they reaped $12 million in illegal profits by trading in shares of a discount clothing chain.
  • The U.S. Securities and Exchange Commission alleged that Saleem Khan was routinely tipped by his friend Roshanlal Chaganlal, who was a director in the finance department at Ross headquarters in California.
  • Mr. Khan used the confidential information to illegally trade on more than 40 occasions ahead of the company’s public release of financial results.
  • The SEC’s complaint charges Mr. Khan, Chaganlal, Mendonsa, and Akbari with violating the antifraud provisions of the federal securities laws.

The target for installing ATM

  • Eighteen public sector banks, including SBI and PNB, failed to fulfil the target for installing ATMs during 2013-14, leaving more than over 9,300 branches without cash vending machines. As part of the target, a total of 34,668 onsite ATMs were to be installed by PSU banks during the last fiscal.

  • However, they could set up only 25,331 such machines by March 2014, thus falling short by 9,337, as per Finance Ministry data. Installation of Automatic Teller Machines (ATMs), especially by public sector lenders, has been a major priority for the government’s efforts to ensure financial inclusion.

  • Pursuant to Budget 2013-14 announcement, public sector banks were required to ensure an onsite ATM in ever branch. As on March 2014, Allahabad Bank was yet to set up 1,950 ATMs, Central Bank of India 1,620, Syndicate Bank 1,085, Bank of India 7,44, State Bank of India (SBI) 696, Indian Overseas Bank 553 and Punjab National Bank (PNB) 499. On the other hand, Bank of Baroda, Bank of Maharashtra, Canara Bank, IDBI Bank and the four associates of SBI managed to meet the targets given to them.

  • There are roughly about 1.4 lakh ATMs of public and private sector banks in the country. Financial inclusion aims to extend financial services to the large hitherto un-served population of the country. In addition, it strives towards a more inclusive growth by making financing available to the poor in particular.

Inflation hits five month high

  • Even before the effect of deficient monsoons begins to kick in, wholesale price inflation hit a five-month high of 6.01 per cent in May with the rate of rise of food prices running at 9.5 per cent. The bad news came after Prime Minister Narendra Modi warned: “To improve the economic health of India, pull the country out of the current mess shouldn’t we take some bitter decisions?”

  • In April, the rate of growth of the Wholesale Price Index (WPI) was 5.2 per cent; food price inflation had risen at the rate of 8.6 per cent. The pick-up in food inflation was led primarily by higher poultry and milk prices, according to the official data released here on Monday. Wholesale prices of potato are up more than 40 per cent since March. The build up in wholesale inflation in vegetables since March is touching 18 per cent.

  • Fuel inflation climbed to 10.5 per cent in May largely on the back of the Rs.1.3 a litre hike in diesel prices and the lagged revision in the electricity index. In April, the fuel price rate of inflation was 8.9 per cent.

  • The wholesale price data dampened the feel-good that the easing of retail price inflation in May to 8.3 per cent from 8.6 per cent in the previous month had generated. The official release also said that the rate of WPI rise for March has been revised up to 6 per cent from 5.7 per cent.

RBI said avoid excessive legal supervision on financial regulators

  • The Reserve Bank of India (RBI) Governor, Raghuram Rajan, warned against excessive legal supervision on financial regulators as it would hamper policy-making and increase systemic risks.

  • The broader point is that a lot of regulatory action stems from the regulator exercising sound judgment based on years of experience. In doing so, it fills in the gaps in laws, contracts, and even regulations. Not everything the regulator does can be proven in a court of law,” said Dr. Rajan while addressing State Bank of India Banking Conclave 2014.

  • Talking on the suggestions ade by the Financial Sector Legislative Reforms Committee (FSLRC), Dr. Rajan said that the creation of a Financial Sector Appellate Tribunal would hamper the policy decisions taken by the regulator. He asked, “How much checking and balancing is enough? Do we want even policy decisions to be appealable? Can legal oversight become excessive?”

  • The FSLRC had recommended several measures to reform the country’s financial sector. However, Dr. Rajan said that some of the recommendations seemed somewhat “schizophrenic” while still others ‘faddish and impressionistic” rather than based on deep analysis.

  • He warned that because of the tendency of any new organisation to overreach to justify its existence, one should be careful about tying the financial regulator with further judicial oversight.He also criticised the suggestion to merge all regulation of trading under a new Unified Financial Agency, so that the Forward Markets Commission, as well as the bond regulation activities now undertaken by the RBI, would move under a new roof, as would the Securities and Exchange Board of India (SEBI).

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